National Counties index linked bond

dggar

I was reading the account of the National Counties index linked bond.

"The National Counties Index-Linked Savings bond (2nd issue) pays interest at 1.5 times the average annual RPI inflation rate between 1 December 2010 and 1 December 2015,"
In the full explanation there is an example of the RPI increasing by 25% over 5 years and it then states "so you get a pre-tax return of 25% on top of whatever you stashed away"
Am I misunderstanding something as I think this should be multiplied by 1.5 which gives 37.5%


The full explanation
The RPI interest only starts accruing from 1 December 2010. When the account closes you’ll be given 1.5 times the increase in the Retail Price Index between October 2010 and October 2015.
This takes some thinking about. Normally, inflation is expressed as an annual figure. Eg, the current figure shows prices have risen by 4.6% over the last 12 months.
Yet for this account, you're paid using the difference in the RPI index of prices over five years, between October 2010 and October 2015.
The key is this: if the index increased from 133 to 166 over the five years, that's a 25% jump, so you get a pre-tax return of 25% on top of whatever you stashed away. However thankfully the maths works out that you roughly earn the average of the annual rate of inflation each year ie. if inflation plus 50% were 5%, 7%, 3%, 9% and -4% your overall return would be roughly 6%
dggar

alanq

Discussed in https://forums.moneysavingexpert.com/discussion/2780388

dggar

I was actually questioning whether there was an error in the worked example on the MSE description of this product.

Sceptic001

You are correct, dggar. It should read:

...if the index increased from 133 to 166 over the five years, that's a 25% jump, so you get a pre-tax return of [STRIKE]25%[/STRIKE] 37.5% on top of whatever you stashed away.

The next sentence is also incorrect:

...you roughly earn the average of the annual rate of inflation each year ie. if inflation plus 50% were 5%, 7%, 3%, 9% and -4% your overall return would be roughly 6%.

should read

...you roughly earn 150% of the average of the annual rate of inflation each year ie. if inflation [STRIKE]plus 50%[/STRIKE] were 5%, 7%, 3%, 9% and -4% your overall return would be roughly 6%.